Dealing with Reverse Mortgages on Affordable Housing Properties
While not common on affordable housing properties such as LIHTC, Section 8 or Section 515, occasionally, an applicant with a reverse mortgage will turn up, and staff must know how to deal with the valuation of this particular asset. It is much easier than most managers think, and if they know how to deal with regular real estate valuation, they will have no problem with a reverse mortgage. First, some basic information on what a reverse mortgage is.
A reverse mortgage is a loan that lets older homeowners convert part of the equity in their home into cash that does not have to be paid back as long as they live in the home. To be eligible, the homeowner must be at least age 62, own the home outright (or have a very small balance on their loan), and live in the home. The homeowner may receive the cash either as a lump sum, a line of credit, regular monthly checks, or a combination of these. The homeowner still owns the home – not the bank. Repayment is due when the borrower dies, sells the home, or lives someplace else for 12 months. At that point, the loan must be repaid (money borrowed plus accrued interest and fees) either with the proceeds from the home sale, or with money from another source, in which case the owner retains ownership of the property.
For purposes of establishing the value of a home with a reverse mortgage, it should be treated exactly like any real estate with a mortgage. Establish the fair market value of the property with an assessment, appraisal, broker statement, contract, etc. Deduct a reasonable cost of sale (commissions, closing costs, etc.), and deduct the payoff amount of the reverse mortgage. The result is the cash value of the home, and that is what should be used to show the value of the asset. Also, while someone with a reverse mortgage normally will not rent the home when they move-out, it could happen, so be sure to ask about and verify any rental income. This should be considered income from the asset.